Month: March 2014

Since home refinancing has been limited to a maximum 80% of the value of your home, an increasing number of buyers are looking at Purchase Plus Improvements products to meet their home financing needs.

This may be an option worth examining if you would like to buy a new home that needs updating. Whether you’re purchasing a home that needs just a small renovation or a major redo, a Purchase Plus Improvements mortgage can help you transform an ordinary house into your dream home. How Purchase Plus Improvements works

Purchase Plus Improvements programs enable you to obtain funding for the cost of the home purchase as well as the cost of the renovations – up to a maximum value of 95% of the total purchase price.

Conditions of the program include:

• As a borrower, you must provide a list of improvements with quotes at the time of application. As a result, more time may be required for Subject Removal

• The initial advance of funds at time of closing will be up to 95% of the approved value of the property minus the cost of improvements

• The balance of the funds will be held in trust by the solicitor until completion of the approved improvements (time limits may be imposed), which is confirmed via:

o An inspection report or

o Confirmation from a certified appraiser or

o An invoice from the contractor who completed the improvements

• Usual sub-search and Construction Lien Act requirements are to be adhered to at the time of release of holdback

• Some restrictions may apply depending on the lender

As always, if you have any questions about the information above or your mortgage in general, I’m here to help!

At Dominion Lending Centres Barrie, we know that today’s busy lifestyle requires more home ownership options – whether it’s a second home in the city to reduce that weekly commute, or a cottage at the lake for weekend getaways. With our Vacation/Second Home Program, Canadians can now purchase a second home or cottage with an affordable monthly payment with 5% down payment.

Acceptable loan purpose

* Second homes (Type A) available for purchase and refinance

* Vacation homes (Type B) available for purchase only

* Program does not provide for the purchase of investment, rental pool or timeshare properties; therefore, incidental rental income will not be used for qualification purposes.

Canadian home prices continued their surprisingly strong ascent in February, but are unlikely to prompt policy-makers to take actions to cool the market at this point.

The average selling price of existing homes that traded hands across the country last month was $406,372, up 10.1 per cent from a year earlier.

The MLS Home Price Index, which seeks to create a more apples-to-apples comparison of prices by accounting for changes in the location or types of homes that are selling, rose 5.1 per cent. That increase, which was driven by rising prices in Calgary and Toronto, outdid the 4.83-per-cent annual increase in January.

Prices maintained their upward trajectory even in the face of a soft winter sales market. Sales ticked up in February after five months in a row of declines. But they were up only 1.9 per cent from a year ago, or 0.3 per cent from January (the latter comparison being seasonally adjusted).

After seeing the latest data, the Canadian Real Estate Board, which represents Realtors and tracks the market by way of the Multiple Listing Service, cut its forecast for sales this year and raised its forecast for average prices.

“The only thing that has not happened yet is a slowing in Canadian home price growth – but that too will likely come,” Toronto-Dominion Bank economist Diana Petramala wrote in a research note.

She said that home price growth is being supported in many major markets by a lack of homes for sale, which is giving sellers more bargaining power. But listings should improve as the weather heats up and as potential sellers are drawn into the market by the higher prices.

The expectation that home price growth should cool this year is one of the reasons why policy makers – who are facing international scrutiny as pundits debate just how overheated Canada’s market is – are unlikely to act now.

In addition, Bank of Montreal economist Douglas Porter notes that while national price momentum has picked up, the “gains have not been widespread across markets – and that should provide some solace to policy makers.”

Finance Minister Jim Flaherty has taken numerous steps to slow the housing market in recent years, amid concerns that home prices and mortgage debt levels were rising too quickly.

Mr. Porter noted that the average national price is being skewed by a rebound in pricey Vancouver. “For a more realistic gauge of price gains, the median city was up about 3per cent year-over-year (i.e. half of the cities are seeing sub-3-per-cent price growth),” he wrote in a research note.

Bank of Montreal economist Robert Kavcic said that unless you’re in Calgary or have a detached home in Toronto, chances are your property hasn’t actually appreciated anywhere near as much as the 10.1-per-cent jump in the national average over the past year.

The Canadian Real Estate Association is now expecting the national average price to rise 3.8 per cent this year from 2013, to $397,000. It had previously forecast a 2.5-per-cent rise in average prices this year, to $391,000. (It says that the projected average for the year is below February’s average because the national average selling price tends to be higher in the early months of the year).

It now anticipates a 1.3-per-cent rise in sales this year, to 463,700 homes. In December, it was forecasting a 3.7-per-cent rise.

For years, most of Marg Green’s self-employed clients could count on getting a mortgage on the strength of their credit score, and on their word that they were earning enough from their business to repay the loan.

These days, because of rules brought in almost two years ago by the regulator of the country’s chartered banks, borrowing money to buy a home has become harder for many of the country’s 2.75 million self-employed workers – a group that, according to Statistics Canada, has a higher median net worth than paid employees. More Related to this Story

“We went through years and years when my clients who were self-employed could get a mortgage if their credit score was 680 or higher, with next to no documentation,” says Ms. Green, director and broker at Concierge Mortgage Group, based in Mississauga. “Today I’ve got clients going in to their bank for mortgage refinancing and they’re shocked because suddenly they’re no longer approvable.”

In the summer of 2012, the Office of the Superintendent of Financial Institutions introduced Guideline B-20, which required federally regulated banks to tighten their processes for approving mortgages and home equity lines of credit. As part of B-20, banks must now look more closely at incomes before approving a mortgage application.

This presents a problem for self-employed workers, who typically lower their taxable income by maximizing business expenses and personal deductions. Because of the discrepancy between what’s on their tax return and how much money they actually earn, self-employed workers have typically obtained their mortgage through “stated income” applications, which required a signed income declaration and proof of self-employment such as a business registration number or articles of incorporation.

Today, self-employed workers can still apply for a stated income mortgage at some banks, but under B-20 they can borrow only 65 per cent of the purchase value – 10 per cent less than what was allowed before B-20 – without requiring default insurance from Canada Mortgage Housing Corp., Genworth Canada or Canada Guaranty.

“If you have less than 35-per-cent down payment, your mortgage now has to be insured, and insurers have specific guidelines that you need to meet,” says Ms. Green. “For example, CMHC will allow a stated income application as long as you have been self-employed for less than three years. More than three years and you have to qualify according to your net taxable income.”

So what can self-employed workers do to improve their chances of qualifying for the mortgage they need, on terms that work for them?

Jeff Brown, vice-president for delivery initiatives and business integration at Toronto-based Credit Union, says coming in with complete and current financial and tax documents is critical. Meridian usually asks for the latest notice of assessment from Canada Revenue Agency and financial statements from the past two years.

“We may also ask to see bank statements to show regular income going into your bank account,” says Mr. Brown.

Raza Hasan, senior vice-president for retail lending and wealth-management risk management at Canadian Imperial Bank of Commerce, says self-employed borrowers need to make sure they are up-to-date with income and sales tax returns, and that they don’t owe taxes.

They also need to be ready to explain their business. “It’s very important that you be able to discuss the details of your business – your income, expenses, at what point in time you will break even, your business milestones,” Mr. Hasan says. “Then we can look at that and find the right solution for you.”

The more information a bank has, the better it can help self-employed borrowers qualify for the mortgage they want, says Ms. Green, whose client base is made up largely of self-employed workers.

Some lenders take a different approach to increase the mortgage eligibility of self-employed workers. Vancity Credit Union in Vancouver, for one, adds 15 per cent to reported income and will boost the percentage if the self-employed borrower provides financial statements showing deducted business expenses totalled more than 15 per cent.

Ms. Green notes that some lenders affected by B-20 and many still extend a mortgage of up to 80 per cent of purchase value to stated-income applicants without the need for default insurance.

For sole proprietors or owners of an unincorporated business, making the leap to incorporation could also help, says Jeff Hull, senior financial adviser at Manulife Securities Inc.

“Most banks prefer salary, and if you have a corporation you can pay yourself a salary,” he says. “That may make it easier for a self-employed individual to qualify for a mortgage.”

Incorporating could also reduce tax rates and allow the business owner to collect a higher salary or dividend payout, Mr. Hull adds.

They’re handing out mortgages to people without any apparent understanding that today’s home-buying couple is tomorrow’s family of three or four. A lot happens to one’s ability to afford mortgage payments when kids come along, but you’d never know it by the way lenders qualify borrowers.

More Related to this Story It’s designed to show how well you’ll be able to handle the basic monthly costs of home ownership, plus real life expenses such as cars, daycare and long-term home maintenance. Prospective home buyers should try it, and so should existing homeowners who want to see how well they’re handling their finances.

The Real Life Ratio is an expansion of a simple affordability measure I introduced last year called the Total Debt Service and Savings Ratio, or TDSS. The idea of creating something more comprehensive came to me after a Globe and Mail series on daycare was published last fall. We heard from many people about how hard it was to manage the cost of a mortgage in today’s expensive housing market, on top of daycare and other costs.

Use the Real Life Ratio and you’ll know what you’re getting into before you buy a house. You may decide you need to save a bigger down payment, buy a smaller house, live in a cheaper location or not buy at all.

Here are a few important things to know about the ratio:

1. Household take-home pay is used here: Other ratios use gross income, which is less relevant for practical financial planning.

2. This is not a budget: Only fixed costs are included here; food, clothing and other costs aren’t discretionary, but you decide how much to spend.

3. Costs for home maintenance and improvement are included: You won’t face these costs every year, but on a long-term basis they might average about 1 per cent of your home’s value annually; maybe less for brand new homes and more for older ones.

4. There’s a slot to include condo fees: Be sure to add any monthly utility costs that are not included in your condo fees.

5. Your local real estate market plays a big role: A liveable Real Life Ratio may be harder to achieve in big cities with roaring real estate markets.

Guidelines on how to interpret the ratio are provided. For optimum results, make a list of your monthly spending on food, transportation, entertainment and everything else not included in the ratio. Then, see whether your lifestyle is affordable. If your Real Life Ratio is 80, could you get by on 20 per cent of your take-home pay?

Keep in mind that your ratio will change – for the worse if you have kids in daycare and have a couple of cars, and for the better once your kids are out of daycare and you move into your prime earning years.

To ensure the Real Life Ratio reflects real life, I consulted four financial planners. Thanks to Rona Birenbaum, Barbara Garbens, Kurt Rosentreter and Renée Verret for some useful suggestions based in part on spending patterns of their own clients.

courtesy of Rob Carrick globe and mail email me for a copy of the spreadsheet calculator dbattaglia@dominionlending.ca

RRSPs are seen as mostly benefiting people saving for retirement. But they can also be put to good use by adults in their prime working years. Whereas retirees are limited to deferring taxes, younger people can use RRSPs to reduce taxes, or to facilitate buying a house or attending an institution of higher learning.

Reducing your tax now

RRSPs can lower taxes for adults in the workforce if they are planning on taking a break from work for personal reasons, such as to start a business, have a baby, travel or write a book. While in the work force, contributions are made and tax refunds claimed. When the RRSP annuitant leaves work, withdrawals are made from the RRSP at lower tax brackets—thus turning the RRSP into an income-smoothing tool for the purposes of tax reduction. This feature is also handy for the self-employed or other people with variable income.

A young couple may also save on taxes by setting up a spousal RRSP for the lower income spouse. Once in place, the higher income person can make contributions up to their contribution limit and claim the tax refund. After three years, the rules allow the lower income spouse to make withdrawals from the spousal RRSP at their tax rate—thus effectively splitting income and reducing household taxes.

Just be sure to start withdrawals at least three calendar years after contributions are made. In other words, the three-year period doesn’t start ticking away until after the end of the calendar year in which the last contribution was made. So try to make contributions by the end of the tax year, December 31.

When withdrawing money from RRSPs, tax is withheld at source—and the tax rate rises with the size of the withdrawal. Rather than take a large lump sum from one plan, it should be broken up and removed in smaller chunks over time from more than one plan (if possible). This way, the RRSP holder may be able to get more of their RRSP funds right away, rather than having to wait until the next tax-filing period to submit a rebate claim.

Buying a house

Under the Home Buyers’ Plan, a couple buying their first house are permitted to withdraw $25,000 each from their RRSPs for a downpayment, then are asked to pay it back into the plan over the next 15 years. The tax refund gives couples another $12,500 to $20,000 to put down on a home purchase, making it easier to get the house of their dreams, lower mortgage payments, or avoid paying CMHC mortgage insurance fees.

If there isn’t much money in RRSPs to begin with, many couples with contribution room find ways to scrape up the money (for example, a zero- or low-rate loan from a relative). They then pass it through the RRSP to qualify for the tax refund and make a bigger downpayment. Just remember, the contributions have to be in the RRSP for at least 90 days.

Going back to school

Under the Lifelong Learning Plan, people can similarly borrow from an RRSP to fund studies at a qualified educational institution for themselves or their spouse. However, as the plan comes with some restrictions, as well as a repayment schedule, some may find it easier to just withdraw the funds directly from their RRSP.

Conclusion

RRSP aren’t just for retirement. They can be used for other purposes prior to retirement. Indeed, these more immediate benefits may ultimately prove to be more valuable than the tax deferral obtained from saving for retirement should pressures on fiscally strapped governments result in higher tax rates and reduced retirement benefits in the years ahead.

The provincial land transfer tax can add an additional 1 to 2 per cent on the cost of a home purchase if you live outside of Toronto. If you buy in Toronto, the amount is almost double. The Toronto Real Estate Board has been lobbying for five years to remove this tax, claiming that it penalizes buyers in Toronto, who already face record high prices. It also reduces the number of potential sales in Toronto, and thus reduces overall economic activity. It is interesting that no other city in Ontario has introduced this tax, even though they have the power to do so. The problem is that the city needs the money that the tax brings.

First time buyers do get a break as they pay no Toronto land transfer tax when their home costs $400,000 or less. But for everyone else buying a $400,000 home in Toronto, the tax is $3,725, and rises to $15,425 if the purchase price is one million dollars, very common now in Toronto. This is in addition to the $16,475 Ontario land transfer tax that has to be paid. So the total land transfer tax in Toronto today for a 1 million dollar home is $32,000.

As the race for mayor heats up it may become an issue. Karen Stintz says she wants to reform the tax so that it is applied at a higher amount to make the tax fairer. Mayor Rob Ford would like to reduce the total tax by at least 5 per cent. David Socknacki would like to tie it in to the rate of inflation. John Tory has not yet stated his position.

Here are some ways the candidates could change things for the better: • Reduce the tax by 10 per cent;

• Raise the credit for first time home buyers, to $5,725, which would make no Toronto land transfer tax payable for a home up to a price of $500,000;

• Change the policy so that anyone buying their first home in Toronto gets the rebate, even if they owned a home elsewhere in Ontario.

• Change the policy so everyone pays no tax on the first $400,000 in Toronto, regardless whether you owned a home before;

Here are some other things to consider when it comes to the land transfer tax

First time buyer rebates

If you buy your first home outside Toronto, you pay one tax only and are entitled to a $2,000 rebate. As stated above, the second rebate in Toronto is up to $3,725. So, if you have the means and the choice, I recommend buyers buy their first home in Toronto, take the extra rebate, and then buy their next home elsewhere if they so choose. When you buy your first home outside Toronto, you will then have to pay the double tax without any rebate if you later move to Toronto.

Spouse rules

If your spouse has owned a home while married to you, you are not entitled to the first time buyer rebate, even if you never owned a home yourself. However, if your spouse sold the home before marrying you, then you are still entitled to a rebate. So, for example, if you and your spouse jointly buy a home, you would be able to claim 50 per cent of the tax rebate, which is up to $1,000 in Ontario and $1,812.50 in Toronto.

Here it gets interesting. If you take title differently, with your spouse owning 1 per cent and you owning 99 per cent of the home, then you can get 99 per cent of the rebate, which means $1,980 on the Ontario tax and $3,692.75 towards the Toronto tax.

Family transfers

If you transfer property to your spouse, for natural love and affection, no land transfer tax is payable. If a parent transfers a property to a child for no money, there is no land transfer tax payable as long as the property has no mortgages registered against it. If the property is worth $500,000 and there is a mortgage on title with $200,000 outstanding, land transfer tax will have to be paid on the sum of $200,000.